Stock buybacks can boost shareholder value, but they're not always what they seem so make sure your clients know the bigger picture.
Companies in the S&P 500 spent $145 billion on buybacks in the third quarter of 2014, according to preliminary numbers from S&P Dow Jones Indexes. Thats up about 13% from the same period a year earlier. Its also considerably more than companies spent on dividends, which accounted for $89 billion in the same time period.
Many investors are bullish on buybacks. After all, they boost per-share earnings, which often results in an increase in the stock price. What's not to like? Well, for one, buybacks can sometimes mask unpleasant truths about a companys business. If you recommend individual stocks for your clients, or advise them about existing stock holdings, you should take a close look at a companys buyback program.
Consider software giant Microsoft. Despite spending $2.9 billion on buybacks (the fifth largest share repurchase for index companies in the quarter), Microsofts share count actually increased slightly during the period. How could that be? Buybacks are often used to offset shares issued in connection with exercised options. If you only read the press release announcing the buybacks, you may miss that little fact.
You should also look at company revenues to determine if there has been growth. Why revenues and not earnings? Revenue numbers allow less leeway for adjustments. Consider IBM. Although it didnt make the top 10 in buybacks in the third quarter (it was 13th), the company was able to reduce its share count by 9.2% in the 12 months ended September. However, when you look at revenue, you see that it declined 5.5% in year- over-year comparisons. (It was $22.4 billion in the third quarter of 2014, down from $23.7 billion in the third quarter of 2013.)
Here are the top 10 S&P 500 spenders on buybacks for the third quarter, along with the percentage change in share count from the previous quarter. Weve also added revenue numbers from this years calendar third quarter and last years. Click here
to see a web-only version. --Joseph LisantiSources: S&P Dow Jones Indices, SEC filings